This new governance proposal attempts to substantially improve the economics and long-term value add to MC token holders by changing the allocation and use of the ‘free cash flow’ / ‘net income’ generated from the DAO.
Eric Mancini, CFA, CAIA, CFP, Director of Investment Research; Traphagen Financial Group
As an overview, I and other MC token holders, believe the current use of ‘free cash flow’ or ‘net income’ (which we are defining as funds received from the DAO over and above what is needed for reinvestment or to cover maintenance expense) does not provide maximum value for long term token holders or the DAO itself . Similar to high quality equities (also cash flow producing entities) there is substantial evidence/research that the most economically beneficial use of free cash flow or net income (outside of reinvestment back in the business) fall into three categories . These include 1- S hare buybacks (if management feels market price is undervalued), 2- Dividend Payments to shareholders, and 3- in select cases accumulation of some amount of liquid high-quality assets to keep in Treasury for future operations, defense, investment, acquisitions, etc.
I am proposing the following to align MC free cash flow/net income allocation away from the current framework and towards what is historically recognized as the best economic use of free cash flow with some flexibility given to the DAO:
Below are the details of this proposal for the use of all future ‘Free Cash Flow’ /'Net Income’
In each reporting/allocation period (whether monthly or quarterly) the DAO can allocate FCF/NI within the following guidelines. At the discretion of the DAO; given MC token valuation, price, and other market conditions there is the flexibility for a 5% adjustment up or down to these target percentages.
- 50%: Allocation to directly pay token holders in BTC, ETH, or USDC (same hard crypto assets mentioned above) as a ‘dividend’ and source of true passive income from DAO operations to token holders. Long term research confirms that the discipline and passive income a true dividend provides adds value for shareholders of dividend paying companies and the same would apply to a cash flowing DAO. Further I will highlight another crypto cash flowing token (KCS) which has adopted this mandate and provided greater value accretion and lowered token volatility.
- 20%: Allocation to ‘hard crypto assets’ to be stored in the Treasury (only BTC, ETH, and USDC would be considered for this purpose); no more than 50% of this allocation can be used to purchase ETH (100% could be purchased in the form of BTC or USDC)
- 30%: Allocation to burn and permanently eliminate MC tokens from total supply . If the DAO views tokens as undervalued (especially if current market cap is near or below Treasury value) the use of FCF/NI to eliminate tokens from circulation via burn should be accretive to remaining long term token holders.
Complete Elimination of ‘Artificial Price Support’ : This practice is not economically beneficial outside of possibly temporarily propping up token prices that could help short term holders/traders. Eventually this allocation would be ‘wasted’ resources to token holders and the DAO as the true market price will be realized eventually and the tokens bought on the open market (now held in Treasury) would reduce to true market value to the detriment of the DAO itself and long-term token holders.
The motivation for this proposal is to greatly increase the long-term value proposal to long term MC token holders and the token price/DAO itself in addition to attracting a whole new subset of investors (passive income & fundamental). In addition, this would eliminate the ‘waste’ (in our opinion) of free cash flow/net income used in the form of temporary ‘artificial price support’.
We think this proposal builds and improves upon the prior free cash flow/net income proposal (MIP-7) in terms of using historical evidence in the equity market and emerging evidence in the cash flowing crypto market that a combination of token burns (supply reduction) and true dividend payments to holders creates discipline on the part of the DAO and provides strong support for holding MC over the long term on a fundamental basis . In addition, it provides for the build up of ‘hard Treasury’ assets for future defensives/offensive use.
- The Treasury additions via the accumulation of USDC, BTC, and ETF is permitted (with a limit on ETH). This provides the ability for both offensive and defensive hard asset future uses.
- This proposal provides a true passive income (hard asset crypto dividend) to token holders. This both encourages a completely new investor base, anchors the token with true fundamental value, and reduces risk of misuse of funds by the DAO . This also should have the effect of reducing volatility of the tokens and increasing long term token value.
- The proposal also uses free cash flow to reduce circulating supply with token burn.
- As importantly, this proposal eliminates the use of free cash flow/net income for artificial price support. This practice is not used in the equity market to any material degree. This is at best an inefficient use of funds and at worst a near total waste of net income/free cash flow, as the tokens are simply bought on open market at artificially high price, stored in Treasury, and then when true value is eventually realized DAO loses value . This practice adds no value to long term token holders in our opinion and there is no historical evidence to support this practice.
Are there any crypto native tokens that have enacted a similar free cash flow practice? If so, what have been the results?
Yes, one of the best examples is Kucoin (KCS) tokens . This is a crypto exchange that uses 50% of gross trading revenue to pay a daily dividend to token holders. In addition, it takes additional revenue to burn tokens. Since they have enacted this fundamental free cash flow use (similar to cash flow producing stocks) it has performed very well and attracted many new investors with the quality of the value proposition to hold long term . Since 3/1/2021 BTC is down 23%, ETH is up 73%, while KCS is up 300%. In addition, it has experienced drawdowns and volatility either comparable or superior to BTC/ETH over the past year . Over the past year the token has also moved up from the 90 – 110 spot on Coinmarketcap.com to the current spot of 58. A large contributor to all these advantages has been a build-up of a long-term fundamental token holder base built on supply burn and dividends.
Why is the ‘price support’ inferior to the ‘token burn’?
Whereas stock buybacks (akin to token burns) have been used to increase the value of cash flow producing stocks for decades (AAPL great example) , purchasing shares on the open market slightly below current prices to store in Treasury (not burn) has not been practiced. This is because eventually the stock/token will always go to true value eventually and if the DAO purchases MC tokens at an artificially high price, holds these tokens within the Treasury, and then absorbs losses when they move to ‘true value’, that is value lose to token holders and the DAO. T oken purchases and burn will create true supply reduction and sustainable long term value accretion to token holders as assuming steady or increasing cash flows/book value, the smaller amount of tokens in existence will produce a sustainable higher token price.
Why should the DAO pay a ‘hard crypto true dividend’ to token holders?
Like with cash flow producing stocks, many investors look for passive income as a reason to invest (especially in current environment). Combine this passive income and fundamental backdrop, along with a growing crypto native gaming/Meta/NFT DAO; this creates a very strong investment case for a larger set of long-term investors. In addition, paying out 50% of the free cash flow to token holders eliminates the possibility for any misuse or value destruction with a portion of free cash flow and gives more power/choice to token holders.
No spending/budget outlay is needed
Copyright and related rights waived via Creative Commons CCO